It's not a household name ... at least not yet. Give fast-casual restaurant chain Cava Group (CAVA -0.05%) some time, though. It could become a regular destination for millions of Americans.
That's an argument some investors might have a tough time believing right now. Although shares soared following Cava's initial public offering (IPO) in June, the enthusiasm for the stock has fallen off. Even with a rebound this month, the stock still trades 45% below its early August peak. That's not how things were supposed to pan out.
Don't sweat this steep sell-off too much, though. That pullback is actually fairly typical post-IPO. It just needs to run its course. The question is whether the usual post-IPO volatility has already run its course, leaving Cava shares ripe for a prolonged rally off of its recent low. Let's explore.
Cava Group is growing in all the right ways
If you've never heard of Cava Group, there's a reason. As of early July, there were only 279 Cava restaurants up and running, spread across 25 states. That's not a lot compared to the 1 million-plus (give or take) restaurants found in the United States.
It's a business, however, where size doesn't necessarily matter. Consumers will find food they love, and they're clearly falling in love with Cava's Mediterranean fare. Its second-quarter same-restaurant sales were up 18.2% year over year, with new locales driving the rest of what ended up being total top-line growth of 62.4%. Cava expects comparable growth (including the addition of new locations) through the second half of this year.
That's not the crux of the argument for owning a stake in Cava Group, however. Neither is its plan to leverage its brand name to sell Mediterranean foods in grocery stores. While this growth pace and the company's growth initiative certainly bolster the bullish case, the head-turner here is that -- unlike most other young companies of its ilk -- this one is already profitable. Cava turned Q2's revenue of $171.1 million into earnings before interest, taxes, depreciation, and amortization (EBITDA) of $21.6 million and net income of $6.5 million, reversing the year-earlier quarterly loss of $8.2 million.
CAVA Revenue (Quarterly) data by YCharts.
Analysts are calling for more of the same sales and profit growth through 2025, too. So why is the stock down so much?
With the IPO dust settling, Cava's potential is shining through
Young stocks don't behave like longer-established ones do. New equities tend to be far more volatile, with some investors racing to "get in on the ground floor," while others (including insiders) use early post-IPO bullishness as a chance to lock in oversized gains. Then there's the jockeying among traders simply looking to make a quick buck by capitalizing on both of these tides. You can reliably count on wild swings -- first bullish, and then bearish -- in the months following most initial public offerings.
We're now four months removed from Cava's IPO, however, and the dust looks like it's starting to settle. The stock's erratic daily volume is leveling off, and for that matter, the size of its daily stock price changes has become relatively narrow. Translation: The share price should soon more accurately reflect the underlying company's value and growth prospects.
That's firmly bullish, by the way.
See, while Cava Group's plan to expand to 1,000 locations by 2032 may seem aggressive, it's actually quite achievable. That's because the company's expansion (unlike those of many of its competitors) won't cannibalize its existing restaurants. There just aren't that many of them.
Meanwhile, consumers stand ready to try out new flavors, and Mediterranean is a cuisine that's proving increasingly marketable. Not only are Mediterranean foods generally healthier than most average American fare, but there's little else out there that's like Cava.
Analysts certainly still believe in Cava's potential. Despite the stock's weakness following June's post-IPO rally, the analyst community collectively rates it a strong buy, with a consensus price target of $45.22. That's 40% above the current price of Cava shares.
Cava stock is worth the risk
Cava's not a pick for the faint of heart. The echoes of volatility following its IPO are still ringing. A few lingering speculators may have yet to dump a position they wish they'd dumped several weeks ago. Meanwhile, the internet's message boards are still buzzing about Cava ... perhaps serving as an omen of a concerted buying or selling effort. It's still a young stock, and much could still happen to it.
On balance, though, there's now arguably more reward than risk in Cava stock.
Just be sure you're prepared for the occasional unexpected jolt, which may work in your favor as much as it works against you. Either way, Cava Group shouldn't be seen as a core, foundational holding for your portfolio. It's best suited as just a small piece of the higher-risk portion of your investment capital.
